Mervyn King promises “we are ready to provide more stimulus” to inflation?

The last 24 hours have seen a very significant speech on the UK economy. And no I do not mean the one given by the Prime Minister David Cameron this morning who appears to be trying to kick the can of what to do about the UK’s relationship with Europe past the next election. Instead I mean the one given by the Governor of the Bank of England last night in Belfast where he was kind enough to confirm my suggestion of earlier in the day that he would make a pliable Governor of the Bank of Japan!

Mervyn King rewrites history one more time

At first we get an explanation of the state of the UK economy with a revealing and in some ways shocking statistic on the state of real wages.

On average, real take-home pay is no higher than back in 2004.

After writing about Japan yesterday the concept of a lost decade in real wages immediately comes to mind and we are nearly there. This has led to economic weakness as described below.

That has been responsible for an unusually weak recovery in consumer spending which, after falling initially by some 7%, is still more than 4% below its peak.

So far he and I agree but we part company below as Mervyn omits to point out that the fall in the value of the pound in 2007/08 where it fell by around 25% was something which he told us would help “rebalance” our economy rather than ignite the fires of inflation.

And higher energy and food prices, as well as tax changes and a lower exchange rate, passing through to the level of consumer prices, have all contributed to the squeeze.

You may note the way that “lower exchange rate” is hidden away in the middle of the sentence! You may also note that he omits to point out that loose monetary policies such as the £375 billion of Quantitative Easing that the bank of England has applied under his Governorship have contributed to commodity inflation as the cash has splashed around the world economy.

But never fear the rebalancing has only been “delayed” . I await his update on how the effects of a currency depreciation take five years or more to impact on the economy!

Policy has been wise

We have another echo of the Bank of Japan here.

The Bank of England has played its part by administering a powerful combination of medicines.

So powerful in fact that this has happened.

In fact, according to the official figures, there has been barely any growth at all over the past 2 ½ years.

So not that powerful then! In fact it is empty rhetoric. And I guess he felt that a little more empty rhetoric might help.

Monetary stimulus is already very powerful

The UK’s banks

Let us have some more rhetoric

Much has already been done to fix the banking system in this country. And there has been a real improvement in the position of UK banks.

But unfortunately people do not seem to believe you Mervyn.

Yet there remains anxiety in markets about the resilience of UK banks.

It is almost like a Christmas pantomime.

What about inflation?

Inflation too has disappointed recently

It has indeed although many will argue that it has done so for a bit longer than just recently. For a moment Mervyn may have been tempted to take the credit for finally finding something on his watch that is above target! But of course the realisation that it is supposed to be his job to keep it on target would have then hit him like a cold shower.

What to do? Oh yes blame somebody else!

It is set to remain above target for much of this year – in part because administered and regulated prices, such as those for electricity and gas, rail fares and university tuition fees, will put unusually strong upward pressure on inflation.

Odd that the effect of the currency fall he supported on electricity and gas prices seems now to be nothing to do with him. Also rather than looking for excuses he should be arguing against instances of institutionalised inflation rather than washing his hands of them.

Is it time to change UK monetary policy?

We get an interesting suggestion here.

It would be sensible to review the arrangements for setting monetary policy.

We then get a paragraph discussing the speech Mervyn gave last October which argued that we did not need a change,after all according to him it has all been going so well.Oh dear! Especially if we think about how little has changed since then. Also we then get a confession that policy has already changed.

The remit overall has become known as ‘flexible inflation targeting’.

Well flexible upwards anyway as even the prospect of any downwards move in prices seems to cause outright panic at the Bank of England. Also we see a confession of this.

The horizon over which inflation should come back to target is effectively delegated to the MPC

Whereas in public they have continually claimed this.

and the Committee believes that it is likely to come back to the target over the next two years.

However this includes the period when rather than doing that this happened.

Inflation rose to over 5%

And as Mervyn seems to forget let me remind him and you that this higher inflation via its impact on real wages (as discussed above) has been a contractionary influence on the UK economy. So we have had inflation above target and little or no growth which is exactly the opposite of what we are being told is the objective!

In his suggestions Mervyn becomes increasingly inconsistent and loses the plot. For example he tells us this.

To drop the objective of low inflation would be to forget a lesson from our post-war history.

Odd that he has just confessed in this speech to doing exactly that! Or more subtly he is saying that it is an objective more honoured in the breach than the observance. Also he makes a confession of failure over his whole career.

First, the primary responsibility of any central bank is to ensure stability of the price level in the long run.

The Retail Price Index was re-based at 100 in 1987 and is now at 246.8 . I will leave it to Mervyn to explain how this represents long run price stability.

Inflationary expectations

These are given a glowing review.

The anchoring of inflation expectations has been the most successful aspect of the inflation targeting regime and it has allowed the Bank to avoid an unnecessarily damaging tightening of policy in response to short-run movements in inflation.

Odd then that the Bank of England ‘s latest survey tells us that expectations of inflation a year ahead have risen from 3.2% which is already above the official target to 3.5%. I think he need to tell us “anchored” to what?

Still if you are saying something that is not true repeating it will apparently help.

It is precisely because inflation expectations have so far remained firmly anchored that the MPC has been able to respond flexibly to weak demand.

My “rebalancing” is your competitive devaluation and their currency war

This verb seems to decline oddly. Only last Wednesday I quoted Mervyn King giving a very strong hint at a November press conference that he would like the exchange rate of the pound to fall.

the effective exchange rate of sterling has risen by 8 per cent and against the euro by 12 per cent. That is not a welcome development.

But what is good for the UK is a bad idea for everyone else.

an increasing number of countries are coming to the view that only a lower real exchange rate will provide the stimulus to demand that their economies require. Several have taken action to achieve that end. That is a recipe for competitive depreciations, what some have called “currency wars”.

Comment

So on his way to suggesting that the UK should consider changing its inflation targeting regime the Governor of the Bank of England has confessed that it had already changed! Also his speech is riddled with the results of the inconsistencies of his policies and accordingly contradicts itself regularly as he tries to swerve responsibility for the many failures.

This morning has seen the UK employment report which adds yet more weight to the issue of falling real wages. If you use the Consumer Price Index they are now falling at an annual rate of 1.2% and 1.6% if you use the Retail Price Index. So a further contractionary influence is being applied to the UK economy.

Last night on my way home I bought a cooked chicken from a supermarket which had risen in price by 10% in a fortnight and it somehow seemed symbolic. Thanks Mervyn!

The whole post sounds like a script for a new ‘Jim Hacker’ program. The sort of funny that makes you wince when you relate it to reality.

So excellent post – still wincing here ……..

http://www.facebook.com/TheRealFinney Andrew Finney

I like the declining verb, perhaps I can suggest another for central bankers: I’m independent, you work in partnership, they’re a bunch of puppets.

Robert S

Shaun,

As always, an excellent article. I do enjoy it when you take time to pick through a speech, especially the maleficent that is the Governor of the BoE!

Have you done a post that I can re-read, or can you do one, where you compare inflation targeting against GDP nominal targeting? I’m not fully understanding the arguments.

Thank you.

Robert

Andy Zarse

Hi Shaun, a belated happy new year to you and all other MM regulars. I’ve been lurking and reading but haven’t commented recently as we’ve been a tadge busy moving house, but also my thanks go to the idiotic regulatory changes imposed by our old friend Mr Sants… sorry I mean Sir Hector. I signed a petition calling for his knighthood to be withdrawn. He’s presided over a collapse in savings and pension scheme membership, the destruction of an important industry; this deserves a gong how precisely?

Your purchase of a cooked chicken is an allegory, I suppose, for the whole mess left to us by MC Merv – AKA Slipmaster Slippery Eel – and his gang of Inflators. I have to say his control of the narrative is excellent and in inverse proportion to his control of the economy. It’s a shame supermarkets don’t do cooked goose…

Best wishes, Andy

jrh

Thankyou for your forensic account of an important speech that is unlikely to be covered by the mainstream media.
Whether its Dave defering or Merv swerving they just confirm their “Not on my watch” philosophies.
I have wondered for some time what song would stick in Merv’s head I think it would be Dusty singing:-
Like a circle in a spiral
Like a wheel within a wheel
Never ending or beginning
On an ever SPINNING reel
As the images unwind
Like the circles
That you find
In the windmills of your mind!

forbin

Hello Shaun,

small note but wasn’t the GDP figures supposed to be out today ?

Something to hide I guess

Forbin

Ian_Jones

On his last day as Governor it would be interesting to compare the growth in GDP versus inflation during his tenure. My guess is 0% growth and 50% inflation…..

Midge

Friday I believe Forbin.

Rods

Hi Shaun,

Another really excellent blog.

Lord Teflon could have saved himself hours of time writing the speech, by just saying, it is everybody else’s fault. This I have always found to mean when said by those in charge is what they really mean is I’m totally incompetent and haven’t the faintest idea what is going on. I get the distinct impression that Lord Confuser King has his fingers crossed and is counting down the days to June, hoping our Sterling crisis doesn’t hit before then, so it is not on his watch. Unfortunately, his approach is typical of jobsworths in senior civil service jobs. If he had been running a publicly quoted business, do you think he would have made it through to retirement on his record?

Anyway his speech is a bit late the pantomime season is over. All that was needed was a sign behind him, saying “But you are in charge” and the audience shouting its behind you!

His overseeing of the massive credit bubble with interest rates far too low I’m sure was nothing to do with him and he was as shocked as anybody (except the economists that were writing about this well before it ended in tears) when the bubble burst.

With the Government spending 49% of GDP where they have made no real effort to get to grips with public spending and the creation £375bn of funny money to prop this up why are they surprised that the net result is stagflation with falling real wages.

Total debts as a percentage of GDP is the highest in the world in Ireland at about 670% and next at about 500% for Japan and the UK. What would have been more informative from Lord King as much of this debt has occurred on his watch is how he thinks the UK economy is going to repay this especially when interest rates start rising? Are we also like Japan going to have a couple of lost decades or more?

So my record of the day for Lord King the Confuser is “It wasn’t me” by Shaggy.

JW

Hope you are well stocked with popcorn before hyperinflation hits the price of even the most important commodities!

Anonymous

While I heartily endorse your comments about the devious and truth-economical Sir Merv, I have to confess that I don’t really understand the dual roles of the BoE and the Treasury. Clearly no country can afford genuine independence of its central bank. You can only have one political boss in any enterprise! But we are still working with this pretence and the way it has turned out seems to allow the Governor to fly cover for the Chancellor on all the hard bits, while the Chancellor keeps very quiet. Is Osborne still working in Number 11? The laughable double act will no doubt continue with the new Canadian, but clearly we are being set up for ongoing and considerable (actual as opposed to publicised) inflation designed to help all those state, corporate and private individuals with excessive debts to struggle along a while longer. And perhaps more QE, the full effects of which have yet to emerge. You can call these sorts of manoeuvres whatever you like, but I will remember Sir Merv as currency-debaser extraordinary. The numbers involved are truly enormous.

Noo 2 Economics

Hi Shaun,
It looks like Merv will be assured of a job at BOJ as he and Abe seem to be singing from the same song sheet! – Lets get inflation cranked up with plenty of QE and currency debasement, then “magic” will happen the economy will take off, inflation will fall and unemployment will no longer exist!!

Has he (or the silent Boy George at No 11) even heard of the concept of money velocity I ask myself.

On another note he is only saying what you have been saying about institutionalised inflation – perhaps this is a civil servant trying to bring some small pressure to bear on the Government to stop dictating price increases in certain industries hoping the media will pick up on it and put the question to Ravin Dave and Boy George?

Anonymous

If I remember correctly the Chairman of Bartlets bank who is made Governor of the Bank of England in return for promising a cut in interest rates is portrayed as something of a clown…

Anonymous

Hi Andy
Happy New year to you too. As to his “control of the narrative” I am afraid this is mostly due to the fact that the majority of the media simply copy nad paste the press releases they receive.

Anonymous

That is a very good idea and I have made a mental note to do that. Should I forget please feel free to remind me….

Anonymous

Ah yes Dusty Springfield! Although one could also make a case for Mervyn King singing “Wishin and Hopin” to himself….

In an unusual turn of events I find myself on the same side of this argument as Adam Posen who made his views clear earlier this week.

Anonymous

Hi Rods
A bit like the Vapors and “turning japanese” Shaggy must be stunned at the uses to which his lyrics are put! Still its free publicity..
As to Mervyn there was another part in the speech where he said the downwards move in real wages was necessary so he occupied pretty much ervy position possible on that subject in one (abject) speech.

Anonymous

Hi Noo2
I take your point that he is giving the concept of “institutionalised inflation” some publicity and airtime. But rather than wringing his hands he should be thinking up plans and solutions. If they had appointed me to the MPC I would have taken a much more positive approach to this subject.

ninoinoz

Er, verbs conjugate, nouns and adjectives decline. Shaun made the same mistake in the piece above.

Anonymous

Let me apologise on both our behalfs as I was responsible for thinking of it as I,you, it/them but not writing it as such.

http://www.facebook.com/VizorianDude Miles Saunders-Priem

Don’t expect any different from Mark Carney, he may promise a new direction but he’s a a Goldmanite (a member of Goldman Sachs and they’re everywhere in central banks), the first one to be head of the BOE, so look for him to make a U-turn and continue on with Merv’s financial repression policies.

HarryA

Hi Shaun,

As ever, excellent analysis. As we approach June,

1) The good news should be that the Governor to be – a Goldmanmite and rockstar central banker – is unlikely to swerve around as much as the incumbent and will be much more direct and forthright. However,

2) The bad news is he’s already harping on about nominal GDP targets…

H

Shaun Richards is an independent economist who studied originally at the LSE. His speciality is monetary economics and he uses it to analyse current economic trends. He started his career in the City of London in 1985 and brings his trading experience in bond, currency and derivative markets to his analysis of current economic events. Follow him on twitter @notayesmansecon.